Medical practices operating in discounted fee for service managed care markets must address all of the financial and nonfinancial issues involved in a relationship with a managed care plan. These issues are spelled out in the provider contract between the managed care plan and its participating physicians. But what if the medical practice does not like the financial and nonfinancial terms of the contract? Can the practice change them? What if the managed care plan changes the terms of the contract after it is signed? Can the practice change them?
Success in changing managed care contracting terms usually varies from locale to locale. However, success can be achieved if the practice has the LEVERAGE to negotiate or renegotiate favorable contract rates and terms. Leverage can be achieved in many ways; If a practice does not have this kind of leverage, most practices will have to accept what is offered to them by the managed care plan. More often than not, this will usually have a major impact on the finances of the practice.
A Changing Marketplace
Right now, any owner of a medical practice should be concerned. This not only includes physician owners, but any hospital or other independent entity (ex. Physician practice management companies) that has acquired and now operates a medical practice. The reason is a financial domino effect directly targeting and impacting physician practices around the country. The first domino are employers who wish to decrease what they pay for health insurance. Many of these employers are switching to managed care plans because of the cost savings that can be achieved. The second domino is the managed care plans themselves and their continued penetration in to many service markets around the country. Managed care is entering many markets as a new payer to the area, while in many areas where there already is managed care, these health plans continue to increase their marketshare. The third domino in the chain is physician practices that have to sign up with these managed care plans in order to have access to a patient base. If these doctors do not join or remain a provider in a managed health plan, he or she cannot see and treat the patients who are enrollees in the plan. This issue is critical in areas where managed care is growing.
The fourth domino is competition among health plans themselves. In order to gain marketshare, many of these health plans have had to reduce what they charge as premiums to the employers in the service area. In other words, there is a fierce amount of competition for employer health insurance business. Since many employers first and foremost look at cost as a reason to select a particular health plan, many of these plans have been reducing what they charge as premiums in order to compete. The end result is a decrease in what these plans bring in as revenues. If costs cannot be contained or reduced, health plans will begin to lose money (i.e. profit), which we have begun to see already around the country. Even many of the new managed health plans are starting out with a lower reimbursement schedules than their competitors. These plans know up front that they will have to compete based on price in the service area.
The last domino in the chain is back to the physician practice itself. If health plans have to reduce what they charge as premiums to local employers, they also have to reduce their medical delivery costs to sustain profitability. This not only includes hospitals and physicians, but all health care providers as well. So in an effort to reduce their physician-specific medical costs, many health plans have begun changing how they reimburse doctors for his or her services. The most common change is a switch to Medicare’s RBRVS payment methodology. Many payers around the country have notified their physician providers that they are switching to Medicare’s payment system and as a result, service reimbursements are getting cut anywhere from 20 to 50 percent. In other words, in the short term, managed health plans are placing their economics directly onto the backs of the owners of physician practices.
It appears managed health plans are not concerned right now with the real driver of health care costs, which is utilization and related clinical outcomes. When a payer switches to the Medicare system and pays everyone on the basis of the same conversion factors, there is no distinction between “good” clinical doctors, “poor” clinical doctors, and “bad” clinical doctors. They all get lumped in together. So it seems these payers are more concerned right now with pumping up their own bottom line profit margins rather than addressing the issue of quality delivered health care.
So as you can see, when the dominos begin to fall, a physician practicing in a highly concentrated managed care market can expect a direct hit on its bottom line profit when these health plans begin to change their reimbursement schedules. These lowered reimbursement rates not only impact specialists, but sometimes primary care doctors as well. This is especially true for the billing of ancillary services. All told, this has an obvious direct impact on what a physician may be able to take out of the practice as compensation. If a hospital or other entity owns the practice, this too has a direct impact on what the entity is able to pay its employed physicians. Therefore, unless a practice is in a position to negotiate or renegotiate these changing rate schedules, it is expected many physicians will soon experience a decline in compensation. Can managed care contracts be negotiated? The answer is yes but the ability to negotiate or renegotiate is often decided by the amount of leverage a particular practice, or its owner, has in the marketplace.
Leverage Defined
Leverage can take many forms. As such, practice owners need to be on the look out for them or begin the process of positioning the practice for leverage. Without it, contract negotiations will most likely fail.
Leverage in Numbers
The first form of leverage is the so-called “numbers” strategy. Practices or delivery systems that have a significant amount of the managed care plan’s provider panel usually have some form of leverage. This is because the managed care plan knows it runs the risk of losing a portion of its panel if these doctors terminate the contract. If doctors leave a network, the patients they treat will have to seek other providers, which they may or may not like. Parents do not like switching pediatricians, people want to keep their primary care physician, and women do want to be forced to change their Ob/Gyn doctor. Primary care doctors often do not want to be forced to change their referral patterns to other specialists. If doctors leave the plan and patients have to switch doctors as a result most will complain to their employers. This often gives a negative impression about the managed health plan, which of course they want to avoid. This might impact the health plan’s ability to keep certain employers as customers in the future.
So to gain this type of leverage, doctors have formed independent practice associations and group practices. They can also attempt to expand their already existing practices or delivery systems by adding more doctors to them. Hospitals have attempted to create PHOs (Physician Hospital Organizations) with their medical staff. In doing so, practices and delivery systems must always be aware of the federal antitrust rules. The federal government basically does not like situations where doctors come together in numbers simply to negotiate against a managed care plan.
When negotiating using the numbers strategy, keep in mind this important point: If the payers perceives that it has alternative provider choices should a particular doctor or number of doctors leave the network, contract negotiations will be difficult. For example, an IPA of 20 ophthalmologists may decide to reject a particular contract by submitting their termination notices to a payer. More than likely the issue of a possible termination by the doctors came up during contract negotiations. If the payer feels it would have adequate ophthalmology coverage should these doctors leave the network, the payer is asking itself why it should concede anything during the negotiation. Success during this type of negotiation would depend on whether the IPA had possible geographic leverage or leverage through documented clinical quality.
Geographic Leverage
Managed care plans generally do not want to run into a situation where the patients will not have easy access to the doctors within the health plan’s provider network. When this occurs, the network has what is often called “geographic holes” in the provider service area. Payers what to avoid this predicament because in time patients will begin to get very upset if they have to drive a perceived long distance to see a doctor, resulting in subsequent complaints to their employers. This could have a negative impact on the managed care plan because employers want their employees to be happy with their health insurance benefits. If the problem is not cured, it could cause the employer to switch to another plan with a broader, more complete, provider panel. As a result, the health plan could lose some business.
No Competition
Not having competition is another form of negotiation leverage. If the practice is the only medical specialty in a particular service area, it usually has leverage against managed care because the managed care plan has no or few contracting alternatives. For example, take the pediatric subspecialty practice that is the only subspecialty practice in the service area. In this situation, the managed health plans are usually agreeable to a negotiation because they know the practice has the ability to stay out of the network. This means the practice will be paid at higher reimbursement rates. The payer will have to concede something if it wants these doctors in their network at a negotiated discount off the practice’s regular fee schedule. Becoming an “in network” provider could be an advantage to a practice because it reduces the amount of “ red tape” often associated with out of network providers (i.e. the difficulties associated with getting approval to treat a patient as an out of network provider).
Circumstances become somewhat clouded when there is more than one doctor of a particular medical specialty in the service area. The first one willing to go “in network” will reduce the leverage of the other practice(s) because the payer now may have a contracting choice. This choice could be limited if the practice(s) going in network do not provide adequate geographic coverage as described above. Also keep in mind the recruitment of a new provider to the area might impact future contract negotiations. This is one reason why a practice with real leverage may want to go in network if favorable rates and terms can be negotiated. This is because any new doctor to the area, assuming the doctor will set up a competing practice, just might accept managed care contracts freely. In this situation, the practice that decided to remain out of network could find difficulty with future contract negotiations.
Quality
The next form of leverage is utilization and outcomes data (i.e. quality). Practices and their owners who are progressive enough to obtain, assemble, and analyze outcomes data will have a significant amount of leverage against managed care plans. Why? As stated above, managed care plans usually pay most all doctors at the same rate schedule. If a practice or delivery system can present data showing it is a lower cost provider than the other doctors of the same medical specialty on the panel, the managed care plan will usually consider giving the doctors some kind of an increase in reimbursement. If the managed care plan does not, it shows the employer community that is does not care about quality. Obviously they do not want something like this to be exposed.
The following are a few samples of some of the most common quality indicators:
§ Cost per patient for a particular series of diagnosis codes
§ Surgeries performed as a percent of patient encounters
§ Usage of ancillary services
§ Lengths of stay in the hospital
§ Specialist referrals as a percent of patient encounters or by diagnosis codes (for primary care doctors)
§ Number of repeat visits due to surgical complications
Keep in mind quality can also be defined by clinical outcomes as well as by hard figures. One example is asthma and allergy: What are the number of days missed from work for those patients the practice is treating? For Glaucoma specialists: How well was eyesight restored after glaucoma surgeries or are there complications?
It is important to remember that managed care plans do not on their own go out to doctors on their own volition and give them an increase in reimbursement rates. Doctors must be the ones to ask for such an increase. Medicine needs to become more efficient, but this is a process that is not going to happen overnight. However, it is the practices that do become efficient and cost effective that will most likely end up the true winners in the managed care reimbursement playing field.
Patient Volume
Treating many patients enrolled with the payer might be another form of leverage. If a group of doctors are treating many of the plan’s enrollees as patients, obviously the plan does not want to lose this group. If so, the patients will have to find other doctors, who most do not want to do. Patients often become attached to their physician and want to remain with them. This is particularly true of any primary care practice, such a family practice, pediatrics, and even Ob/Gyn. Managed care plans understand this and work to prevent it.
Use the 20% rule to see if this form of leverage exists. Each year the practice should conduct a study of the so-called 20 percent rule. Under this rule, no more than 20 percent of the practice’s total managed care revenue should come from one managed care plan; otherwise, the practice may be at financial risk.
Example of the 20 Percent Rule
At the end of a year, ABC group practice collected $1,000,000 in patient revenue. Of this total, 50 percent ($500,000) of the revenue came from managed care plans. Of the $500,000 in managed care revenue, half came from one single plan (50 percent of the total revenue).
In the example, this group of doctors must assess whether its practice can afford to lose $250,000 of revenue (50 percent of the total) if one or more of its providers are removed as a provider from the plan. Many physicians may not realize that a substantial amount of their revenue is at risk if one particular managed care contract is ever terminated or if the payer decides to change the terms of the arrangement. However, while this is a definite negative, it is also a positive since it means the practice treats many patients of the plan and as such, may have some negotiation leverage. In this situation, attempt to negotiate or renegotiate contract rates and terms.
Termination
The final form of leverage is contract termination by the doctor or the practice. As obvious as it is, this is the most dangerous form of leverage. There will be situations where a doctor, practice, or delivery system might or will terminate a contract just to force the managed care plan back to negotiating table. But what happens if the plan calls this so called “bluff’? Obviously the doctor or doctors will lose revenue in this instance since they will lose access to patients. Therefore before considering such a move, a practice or its owner should analyze very carefully whether or not this leverage will work and the ramifications if it does not.
